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On December 16, AstraZeneca Pension Fund closed a £2.5 billion longevity swap with Deutsche Bank. This followed a £1 billion transaction last week by Carillion, with Deutsche Bank once again acting as intermediary. In both transactions, the risk was ultimately passed to reinsurers.
Paul Kitson, London-based lead adviser to Carillion and pensions partner at PwC, says: "Looking back on some of the earlier trades I worked on, reinsurers did not want to have a dialogue with the pension fund they were swapping cashflows with. They didn't really know what the pension fund landscape looked like, so they were comfortable doing it all through the intermediary." "Now, the pension fund advisory community spends a lot more time with the reinsurance community and vice versa, so there's more comfort between the sectors than there was before", Kitson adds.
An increased emphasis on pricing transparency has also made the swap structure more suited to pension funds and reinsurers alike. Greater collaboration between counterparties may also be a function of more intense competition between reinsurers in the longevity risk space.
"There is significant competition in the reinsurance environment compared with last year. This makes having the pension fund more alongside the intermediary in the negotiation really key, as it allows the fund to use that competitive pressure to deliver a better price in the transaction", says Kitson.
The longevity transfer market beyond just swaps has surged in the past few months. Last month, consultancy Lance, Clark and Peacock warned the frenzy of activity in the bulk purchase annuity market could lead to a capacity crunch among the UK's largest longevity insurers.
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